How to Dollar Cost Average Bitcoin

The following article is for educational purposes, not investment advice

By Grant Kurz
Consultabit, Founder & CEO

Introduction

Want to buy Bitcoin, yet wary of Bitcoin’s high rises and steep falls? Enter Dollar Cost Averaging (DCA), a popular investment strategy where you buy an asset at regular time intervals to reduce the impact of market volatility.

When the long-term growth of an asset is foreseen, consistently investing a set amount throughout the highs and lows of the market means you reduce the probability of inappropriately timing your investment.

Let’s compare investing $6,500 at Bitcoin’s all-time-high with a single purchase and with dollar cost averaging before we walk you through how to dollar cost average Bitcoin.

All-Time-High: Single Purchase vs Dollar Cost Averaging

According to CoinMarketCap, Bitcoin’s all-time-high was $20,089 on December 17th, 2017.

As of writing, Bitcoin’s price is $10,228.95 on February 9th, 2020.

We will first determine the return on investment (ROI), current Bitcoin value in USD, and the profit/loss of the single purchase of $6,500 at the all-time-high.


ROI = (Current Bitcoin Value – Cost of Investment) ÷ Cost of Investment

Bitcoin Acquired = $6,500 ÷ $20,089 = 0.32356016 BTC

Current Bitcoin Value = 0.32356016 BTC × $10,228.95 = $3,309.68

Profit/Loss = $3,309.68- $6,500 = -$3,190.32

Therefore,

ROI = ($3,309.68 – $6,500) ÷ $6,500 = -$3,190.32 ÷ $6,500 = -49.08%


Return on Investment
=
(Current Bitcoin Value – Cost of Investment)
÷
Cost of Investment


Bitcoin Acquired
=
$6,500 ÷ $20,089 = 0.32356016 BTC


Current Bitcoin Value
=
0.32356016 BTC × $10,228.95= 3,309.68


Profit/Loss
=
$3,309.68 - $6,500 = -$3,190.32


Therefore,


ROI
=
($3,309.68 – $6,500) ÷ $6,500
=
-$3,190.32 ÷ $6,500 = -49.08%


Return on Investment
=
(Current Bitcoin Value – Cost of Investment)
÷
Cost of Investment


Bitcoin Acquired
=
$6,500 ÷ $20,089 = 0.32356016 BTC


Current Bitcoin Value
=
0.32356016 BTC × $10,228.95 = $3,309.68


Profit/Loss
=
$3,309.68 - $6,500 = -$3,190.32


Therefore,


ROI
=
($3,309.68 – $6,500) ÷ $6,500
=
-$3,190.32 ÷ $6,500 = -49.08%

Next, we will use Consultabit and Bitwage’s Bitcoin Dollar Cost Average Calculator to calculate ROI and current Bitcoin value in USD by dollar cost averaging $6,500 ($250 monthly) starting from the all-time-high.

Let’s tabulate the single purchase and DCA results below:

Table: ATH Single Purchase VS ATH Dollar Cost Averaging

As we can see above, buying Bitcoin with a single purchase at the ATH yields a -49.08% ROI, whereas dollar cost averaging Bitcoin starting from the ATH yields a 52.94% ROI. Dollar cost averaging turns the worst first buy into a great one.

We will now cover the three steps for how to dollar cost average Bitcoin in detail.

Let’s get started!

Step 1: Choose Your Time Interval

In dollar cost averaging, the time interval is the amount of time you must wait between Bitcoin purchases. For example, if your time interval is one week, then you will purchase Bitcoin every week starting from your first purchase.

You may select any time interval, as long as the investment purchases are consistent. Every week, every 39 days, the timeframe does not matter as the decision is personal. However, choosing an intuitive time interval may help you maintain steady purchases.

Here are a few common DCA time intervals:

  1. Every paycheck
  2. Weekly (every week)
  3. Biweekly (every two weeks)
  4. Semimonthly (every 1st and 15th of the month)
  5. Monthly (every month)

Once you have chosen a time interval that works best for you, the next step is to calculate your periodic investment.

Onwards!

Step 2: Calculate Your Periodic Investment

A periodic investment is the amount of money you spend to buy Bitcoin at regular time intervals. How much you decide to periodically invest is personal for every investor, as everyone’s financial situation is unique with respect to differing levels of wealth, risk tolerance, and additional factors.

Cryptocurrency investors typically choose between two options when dollar cost averaging into Bitcoin. The first is to invest a total dollar amount over time, such as $6,000 over 12 months. The second is to invest a set amount into Bitcoin at regular intervals perpetually, or for the foreseeable future. Examples for the second option include 5% of every paycheck or $100 a week.

Here are a few possible considerations for periodic investment amounts into Bitcoin:

  1. Total dollar amount over time (such as $6,000 per year)
  2. Percentage of paycheck, perpetually
  3. Percentage of yearly income, perpetually

Let’s find out how to calculate the previous alternatives below.

Total Dollar Amount Over Time Calculation

If you choose a total dollar amount over time, then the calculation for your periodic investment is your total dollar amount divided by the number of time intervals.

Let’s say ‘Bob’ decides to invest $6,000 over one year, monthly.

Total dollar amount: $6,000.

Time interval: 1 month.

Number of monthly time intervals in one year: 12 months.

Thus, your periodic investment is $6,000 ÷ 12 months = $500 per month.

Percentage of Paycheck, Perpetually

If you choose a percentage of paycheck perpetually, then the calculation for your periodic investment is your paycheck total multiplied by your investment percentage allocation.

Let’s say ‘Alice’ decides to invest 5% of her $3,500 biweekly paycheck, perpetually.

Paycheck total: $3,500.

Investment percentage allocation: 5%.

Thus, your periodic investment is $3,500 × 5% = $175 every 2 weeks.

Percentage of Annual Income, Perpetually

If you choose a percentage of annual income perpetually, then the calculation for your periodic investment is your annual income multiplied by your investment percentage allocation, then divided by the number of time intervals.

You may update your periodic investment as your annual income changes.

Let’s say ‘Jack’ decides to invest 5% of his annual $65,000 income spread into weekly intervals, perpetually.

Income total: $65,000.

Income percentage allocation: 5%.

Total investment amount: $3,250.

Number of time intervals in one year: 52 weeks.

Thus, your periodic investment is: $3,250 ÷ 52 weeks = $62.50 per week.

Step 3: Buy Bitcoin at Each Time Interval

Equipped with your periodic investment amount and time interval selections, you are ready to dollar cost average Bitcoin.

If you need help with how and where to buy Bitcoin, check out our in-depth Bitcoin guide called ‘How to Buy Bitcoin’. The Bitcoin guide provides you with information about exchange risks, Bitcoin wallet security, as well as alternative services to acquire Bitcoin.

Now, simply choose your starting date and time, then buy Bitcoin consistently based upon your purchasing schedule chosen in ‘Step 1: Choose Your Time Interval’. For example, if you chose a weekly time interval at 6:00pm, then you will purchase Bitcoin one week after your starting purchase and subsequent purchases thereafter.

You do not necessarily need to purchase Bitcoin at a specific time if you buy on the required days. However, utilizing a specific time may help you to reduce fear and uncertainty from volatility when you are in the process of buying Bitcoin.

Consider Automating Your Periodic Investments

If you have the option, consider automating your periodic investment into Bitcoin with recurring payment functionality so you do not abandon the strategy. The moment you see the price decrease or increase due to volatility, you may decide not to invest on your scheduled purchase day, thereby reducing the effectiveness of dollar cost averaging.

Conclusion

Dollar cost averaging is a useful tool for investors looking to reduce the effect of volatility within the cryptocurrency market. From the guide’s introduction, the strategy was shown to provide Bitcoin investors an ability to avoid timing the market, which is an incredibly difficult task for even the most professional of investors.

Readers now know how to dollar cost average Bitcoin by following the guide’s steps, which were to choose your time interval, calculate your periodic investment, and then purchase Bitcoin at your chosen dates and time. An in-depth Bitcoin guide named ‘How to Buy Bitcoin’ was also provided if you or someone you know needs to learn how to buy Bitcoin, exchange risks, where to buy Bitcoin, as well as information regarding Bitcoin wallets and Bitcoin wallet security.

About the Author

Grant Kurz, Founder & CEO of Consultabit

Grant Kurz is the Founder and CEO of Consultabit, a blockchain consultancy and software development company. Consultabit equips users with tools, education, and guides within the cryptocurrency and blockchain community. Grant believes cryptocurrencies and blockchain will have a defining force in the 4th industrial revolution.